Russian exporters uneasy about shale revolution

The shale revolution in the US may change the global oil market and Russia’s ambition to become the leading power among the global exporters of raw hydrocarbons.

Recently, more and more analysts and experts have
begun wondering how long Russia can remain one of the world’s leading global
exporters of raw hydrocarbons. The latest trends in the development of the
petrochemical sector indicate that competitors are emerging where they were
least expected.

The biggest importers are declaring that they are prepared, at
least in part, to refuse imports of oil and gas.

The so-called shale revolution could become a threat to the
Russian market. The United States began to invest in developing shale oil and
gas extraction technology around 15 years ago, and today they have partly
succeeded in replacing imports and reducing the price on the internal market.

The reason behind the development of shale oil extraction was a decade of high
oil prices, which began in 2004. America, as the largest consumer of
hydrocarbons, was forced to look for alternative ways to be self-sufficient
with its resources. However, with oil prices at $100 per barrel or higher, it became
profitable to invest in “indigenous extraction,” despite the exceptionally high
initial cost.

The initial cost of shale oil extraction is between $70 and
$90 per barrel, which is significantly higher than that of traditional oil; yet
it still makes sense, when oil prices on the global market are at $100 per
barrel.

Russian companies did not see any sense in investing in these
unprofitable projects, as there are a large number of untapped deposits with an
initial extraction cost of only $20 per barrel. In the end, America, having
invested in new technology, has achieved a breakthrough and is now on its way
to being self-sufficient in energy.

Analysts at the Goldman Sachs bank are
certain that, by 2017, the U.S. will become the world’s largest oil producing
country. Production could rise from 8.3 million to 10.9 million barrels of oil
a day and overtake production in Russia and Saudi Arabia.

What does this mean for Russia? Any increase in production
means that the price will go down on the global energy market. For countries,
this means a sharp reduction in budgetary income.

As far as the petrochemical
sector is concerned, it cannot be competitive without modernization and the
development of production and infrastructure. Competiveness has to be
maintained, so as not to lose established markets.

Thus, Western Europe is Russia’s “favorite consumer.” It
has infrastructure in place to transport oil, and tankers can be used to
conveniently deliver oil products via the Black Sea. A great deal of production
is concentrated in Germany, Italy and France, which ensures stable consumption.
There is however one small problem: Ecological requirements are increasing all
the time in Western Europe.

The introduction of the EURO 5 ecological standard intended
to reduce harmful emissions into the atmosphere is forcing Russian companies to
invest in modernizing production. It is possible, while oil prices are higher
than $100 per barrel, to invest in modernizing technological processes and
creating pipeline systems.

However, it is a completely different situation if
global prices are to fall due to an increase in production.

Russian petroleum experts are proceeding on the basis that,
if America is close to achieving self-sufficiency from foreign imports of oil, Western
Europe will require supplies from Russia for a long time to come. Opportunities
for shale extraction are limited in Western Europe by a lack of space and
ecological risks.

For confirmation of the European orientation among Russian
producers, one need only recall the construction of the Yug pipeline, which is
a Rosneft project. It is aimed at creating a pipeline system to export Russian
light petroleum products from the Black Sea coastal region.

According to data
from Rosneft, the project proposes construction of an oil transportation
pipeline on a route that runs through Syzran, Saratov, Volgograd and
Novorossiysk. This pipeline will have a capacity of 8.7 million tons per year.

Eastern European countries also maintain their faith in
Russian oil. Historically, it worked out that, in Eastern Europe, all delivery
infrastructure for oil and oil products was orientated toward supplies from the
former Soviet Union.

Now, in a time of crisis, there is no sense in making any
cardinal changes. In terms of countries in the Far East — namely China and Japan — they
are dynamically developing economies, which are in constant need of large
quantities of energy resources. China, in particular, is the world’s second
biggest consumer of raw hydrocarbons.

These countries are also trying to reduce their dependence
on imported energy resources, including those from Russia. Only now are they
starting pilot projects to develop shale deposits.

The Japan Petroleum
Exportation Company (JAPEX) is planning to start exploratory shale extraction
in northern Japan, close to the city of Oga in the Akita Prefecture, in 2014.
China, which at present is in third place in terms of combustible shale
deposits, is not lagging behind, either. All this, however, remains in the
distant future.

Correspondingly, Russia has only 10 years to do everything
possible to prevent departure from the market. Demand for oil supplies to China
is bound to increase, as Beijing is only now beginning to develop shale oil
extraction.

An agreement signed as part of the St. Petersburg Economic Forum
between Rosneft and the China National Petroleum Corporation to supply oil to
China for a period of 25 years is a significant step in this direction.

The Russian company will supply China with 300,000 barrels
of oil a day, starting in 2015. The “black gold” will flow along a pipeline
from Eastern Siberia to the Pacific Ocean. Incidentally, the China Development
Bank has provided the finance for this pipeline.

Thus, the development of shale technology around the world
does not hold any promises for Russia, since, in the long term, Russian
exporters will be left with just the Western and Eastern European markets.

This,
however, does not mean that they will lose all their income. Russian companies
will continue to be profitable on account of a sufficiently high marginal sum
from exporting hydrocarbons. Still, the era of high oil earnings will come to
an end.

Natalia Lebedeva is
a financial analyst and general director of the consulting company Miravil
Group.